7 Common Mental Money Mistakes

WSJ round up seven mind games people play that can have them short-changing their personal finances.

1. Mental accounting
Obsessing over the price of a new car, but failing to monitor the weekly grocery bill.
2. Playing it too safe
Putting too much cash in money-market funds and not enough in stocks
3. Misunderstanding risk
Putting too much of your savings in your company’s stock
4. Living in the moment
Not coming up with a monthly budget
5. Throwing good money after bad
Making repairs that cost more than your car is worth
6. Overconfidence
Concentrating picks among a handful of “surefire winners”;
7. Following the crowd
Dumping your stock fund after a steep market decline

Number 5 is basically the principle of sunk costs. Not understanding it results in the same fallacy that keeps you from changing lanes in the supermarket when another line is much shorter just because you’ve been in this one for so long. — BEN POPKEN

Seven Common Mistakes With Money [WSJ]

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  1. MonkeyMonk says:

    Sunk cost is a concept that if everyone took the time to properly understand it, there would be a hell of a lot of better decision making in this world.

    #7 is also important. If you’re in the market for the long haul steep market declines is when you should be buying, not selling.

  2. RandomHookup says:

    5. Throwing good money after bad ..

    But you also have to consider the real cost…what would it cost to replace this car? What the car is worth is fairly immaterial.

  3. enm4r says:

    #4 Monthly budgets are overrated. No one, with the exception of those literally scraping together bus fares or trying to save to buy up some ramen, needs to have anything other than a rounded budget. Consider bills/monthly costs, round up for some cushion, subtract from monthly cash flow, if it’s less, great. If it’s not, either increase monthly cashflow or cut bills. That’s about as detailed as it needs to be.

    #7 is indeed important, but at the same time, it shouldn’t be confused with a “never sell” mentality. There are legitimate times to sell. In March after the first day of the crazy Asian market fall, it made sense to sell, wait out the next week or so, and then rebuy at discount. I saved multiple percentage points on the year for that move.

  4. limiter says:

    I agree with RandomHookup. If My car is worth $1500 and it costs $1650 to fix the transmission, breaks, and something else, then yes you are paying more for the repairs, but are you really better off getting another car. Chances are you wouldn’t buy another $1500 car which means you would end up with a $5,000-$30,000 car. Are you really better off?

    So say you do buy another $1500 car instead of repairing your current one for $1650. I think this can still be a poor decision because you know your car, you know what problems it has and if the $1650 likely fixes the car for a while (say a few years), wouldn’t that be better than someone else’s junker that they’re probably trying to get rid of for the same reason you needed to get repairs in the first place?

  5. savvy9999 says:

    @RandomHookup: Exactly. Cars are the worst “investment” one can make.

    The goal should be to reduce the total lifetime cost of owning automobiles, primarily by owning the same one for as long as possible. Bad, terrible money is having a perpetual car payment.

  6. zolielo says:

    I also agree. How I go about car analysis is: Daily Average Cost of Ownership, Daily Average Total Cost, Average Cost of Ownership per Mile, Average Total Cost per Mile. Total Cost is Cost of Ownership plus initial cost. Cost of Ownership is automotive related association (AAA, DMV, car club), gasoline, insurance, physical part (replacement, tuning), and service (from a mechanic). With those variables a comparison can be had.

    On a different point:
    3. Misunderstanding risk
    Putting too much of your savings in your company’s stock

    If one as stock options it just makes sense to build up a stock pile.

  7. Covert7 says:

    I’ll go along with the others here in disagreeing with number 5. From a straight numbers perspective, it is almost always better to repair a car than replace it. If my car’s engine blows up and I need a new one, even if it cost me $3000 to get a replacement engine, that’s still less than a years worth of $300 month car notes.

    Now if the car is unsafe and can’t be made safe through repairs, then I would consider getting another car. :)

  8. bohemian says:

    My rule of thumb on when to replace a vehicle. If your dumping as much on average over a period of months as you would on new car payments maybe it is time to get a different one. Preferrably used.

  9. DeeJayQueue says:

    @RandomHookup: IAWTC. I can’t afford to replace my jeep because of the steep up-front payment, and increased insurance rates, etc. I can afford to spend a couple hondo every now and again to keep it running.

  10. mac-phisto says:

    like my uncle always says: you never truly get out of paying a car payment. if you’re not paying $300/mo. to the bank, consider putting that money aside for repairs (there’s a good chance you’ll need it soon).

    having said that, know your car. each model has a point where maintenance costs can get VERY expensive as old parts start to fail. eventually, every car reaches a point where maintenance is no longer economically sound. for some vehicles, that can be as soon as 90,000 miles. others will last well beyond 200,000. if you know how to determine this (hint: hit the intertubes), you can save yourself thousands in maintenance costs by getting rid of the vehicle before it coasts over that hill.

  11. laborer says:

    @limiter & Covert7:

    i think the point here is to not waste your money on a piece of crap to begin with.

    my cousin, a cheapass, bought a car just short of a dead mule so he can afford more mcdonalds – he then gets upset at having to constantly spend money on repairs (far exceeding the price of his car). when i suggest he pays more for a better machine, he tells me to f* off.

    but his wasted money and lack of forethought are well worth the taste of those nuggets and american cheese. sorry, had to vent.

  12. kingoman says:

    Not changing lanes at the grocery is just crazy. I feel no investment whatsoever in a grocery line, but I have changed lines many times only to watch the old line suddenly move faster. Doh.

    The reason we learn the wrong lesson from that is that we remember the experience (and maybe feel stupid for giving up too soon). We forget all the times when we changed and it worked better, because we expected that outcome.

    Emotional investment in anything financial is always “a bad thing.”

  13. sr105 says:

    Since when does Consumerist post “upskirt” photos?